CHICAGO — A weak real estate market continues to plague the long-troubled senior living sector, though providers have enjoyed some stabilization in the last year, Standard & Poor’s said in a new report.
Continuing-care retirement communities rely on the ability of seniors to sell their homes and move into the facilities, and have struggled for the past several years amid the housing market’s downturn.
Providers are expected to continue to face lower-than-desired occupancy levels until the housing market begins to rebound, analysts said.
The sector also relies heavily on investment income, which has aggravated already weak finances since the late-2008 market collapse.
On the borrowing side, issuance was down in 2010 and remains lower so far in 2011, according to Standard & Poor’s analyst Karl Propst, who wrote the report, titled “U.S. Not-For-Profit Senior Living Providers: Scanning the Horizon for Brighter Skies.”
The rating agency does not maintain data on capital spending, but does monitor it informally.
“Senior-living providers have curtailed their capital spending over the past couple of years primarily as a means to preserve their liquidity,” Propst said in an interview Friday.
As some providers are starting to stabilize over the past year, they are eying projects but spending overall remains down, he said.
“The industry as a whole has not started spending like they had in the past,” Propst said. “We’re hearing about individual projects here and there, but I do not believe that we’ve seen the floodgates open again.”
So far this year, CCRC issuers have borrowed $813.1 million, according to Thomson Reuters. Issuers borrowed $2.6 billion in 2010, up from $2 billion in 2009 but down from a high of $7.8 billion in 2007 and $6 billion in 2006.
The sector is dominated by triple-B rated credits. Much of the sector remains unrated.
Overall, CCRC medians have remained stable or improved since 2009, Standard & Poor’s said in the report.
Maximum annual debt service coverage medians improved to 1.2 times in 2010 compared to 0.9 times in 2009 and 2008.
The median debt burden was 9.4% of revenue in 2010 compared to 10.2% in 2009. Liquidity has also improved, but median operating margins showed a slight decline compared to 2009 but were still up from 2008, 2007 and 2006.
“We believe the stabilization that began in fiscal 2009 and continued in fiscal 2010 will likely be sustained for at least the next 12 months, although a sustained weakness in the economy and housing values could portend even greater financial challenges for the sector,” Propst wrote in the report.
Standard & Poor’s has upgraded more issuers in the sector than it has downgraded for the first time in four years, and favorable outlook revisions outpaced unfavorable revisions for only the second time since 2007.
Downgrades into junk-rated territory were driven largely by limited liquidity and a reliance on non-operating income and entrance fees, Standard & Poor’s said.
The agency rates 71 nonprofit senior-living providers.